Uncertainty arising from the US-China trade war has been paused with the recent Phase 1 deal.
Global Market Review
Although the global uncertainty arising from the US-China trade war has been paused with the recent Phase 1 deal, there is a new threat to the global economy - Coronavirus
For most of last year, the global economy was focused on the trade dispute between the US and China, which saw each impose tariffs on hundreds of billions of dollars’ worth of one another’s goods. The resulting uncertainty has impacted the global economy for the last eighteen months, although this was somewhat eased when agreement on the Phase 1 deal was announced in early 2020. The agreement was welcomed with cautious optimism by commentators concerned with its durability and longevity.
Disruption in APAC
However, there is now a new threat to the global economy – Coronavirus (COVID-19). At the time of writing, there were 90,000 cases resulting in almost 3,000 deaths. As it continues to spread following its initial outbreak in late December 2019, it has become apparent that the economic impact will not be confined to China and that it may impact the global economy. With factories in China closed or on limited production, reduced manufacturing threatens the global supply of personal computers and other electronics. Apple has already issued a sales warning due to a shortage of supply, resulting in stocks across the globe falling. With many countries restricting the entry of Chinese nationals, the impact on the global aviation, tourism and hospitality industries could be vast.
Having seen economic growth of 6.1% in 2019, despite the trade war, the Chinese economy could be severely impacted by the outbreak. Additional funds have been injected into the economy to ensure enough liquidity in the banking system and to help provide a stable currency market. The Government has adapted a relatively loose macro policy and provided targeted financial support for the industries worst affected. But analysts say the economic impact of the virus – which has left major cities in full or partial lockdown – could significantly harm growth if it lasts for a prolonged period.
India was until recently the fastest-growing major economy. However, some important recent reforms, while expected to benefit the economy in the longer term, such as a unified tax system and demonetisation, have been disruptive in the short term. Reliance on consumption continues and the large informal labour base indicates that there is room for this to strengthen. The large disparity between urban and rural infrastructure emphasises the importance of spreading investment and economic opportunities while addressing urbanisation.
In Australia, sluggish wage dynamics and a rising saving ratio weighed on consumer spending, while contracting investment conditions are constraining the economy. The particularly severe bushfire season also weighed on business investment, farm production, tourism and retail expenditure. However, retail expenditure has seen a rebound in early 2020, and a reduction in unemployment, improving business conditions and indications of a rebound in house prices all provide hope for some improvement.
Singapore’s economic growth should rebound in 2020 on he back of stronger exports and investment, as well as Government stimulus measures. However, like many other countries particularly in the APAC region, the Coronavirus, will likely weigh on activity by disrupting supply chains, global trade and tourism.
Uncertainty in Europe
Unemployment in the eurozone is falling and is currently at its lowest since 2008. However, the European economy is barely growing. The ECB is operating with negative interest rates and has restarted quantitative easing. The UK leaving the EU could further damage growth in the eurozone should they fail to agree a trade deal by the end of this year, when the UK’s transition period ends. Faced with the further threat of a potential slowdown due to Coronavirus, Germany’s finance minister is now hinting that stepping up public investment might be possible, as Germany may be prepared to drop its traditional veto to fiscal stimuli. This is seen as a huge step, as it signals a significant change in the country's attitude and may facilitate a relaxation of EU fiscal rules.
As Europe’s largest economy, Germany, is going through a period of political instability and ongoing economic uncertainty. As with much of Europe, there has been a rise in the popularity of far-right parties and the green parties. The grand coalition is under strain and Chancellor Angel Merkel, who has steered the country for the last decade, has announced she will not seek a fifth term in office. The Bundesbank has predicted marginal economic growth of 0.5% in 2020 and stronger growth of 1.5% in 2021, driven by improved trading conditions and a view that manufacturing will stabilise in early 2020.The domestic economy is robust due to strong consumer confidence, fuelled by positive income prospects and favourable financing conditions, which is resulting in a booming domestic construction market. This is countered by the poorly performing export economy, with the auto industry under pressure from electric technology. The sea change in politics, coupled with the economy nearing technical recession in 2019, does not bode well for the outlook in 2020.
Meanwhile the French economy, Europe’s second largest, shrank in the last quarter of 2019. Nationwide strikes relating to pension overhaul were a significant feature towards the end of last year, but have recently ended, partly due to a capitulation by Government on increasing the retirement age. However, with further reforms in the pipeline and the threat of future strikes, further disruption is likely. France’s domestic economy is due to grow as a result of tax cuts implemented in the 2020 budget and a tightening labour market. As one of the global leaders in the automotive, aerospace and railway sectors, as well as in cosmetics and luxury goods, a subdued global economy is likely to weigh on these exports, causing concern.
The ESRI predicts that the Irish economy will continue to grow at a rate of 3.3% in 2020. Unemployment is expected to remain low as the country reaches full employment. However, of all the eurozone countries, Ireland potentially stands to lose the most in a disruptive no-deal Brexit scenario, and so, uncertainty around Brexit will continue for a fourth year. Political uncertainty also prevails with the recent election and the increase in popularity of left-wing political parties.
In the UK, a comprehensive victory for the Conservative Party has resulted in some political certainty, as they enter negotiations over the future trade deal with the EU. The tight timeframe is a concern and a no-deal Brexit at the end of the year remains a possibility. The Bank of England recently downgraded growth projections for GDP to 0.8% and 1.5% for 2020 and 2021 respectively.
The Israeli economy is expected to perform fairly well this year, with some commentators expecting growth of 3.1%. This growth is underpinned by a strong labour market, population growth and gas exports from the new Leviathan field. However, global trade tensions, a large fiscal shortfall, volatile regional geopolitics, particularly tensions with Iran, and domestic political gridlock all pose risks to the economy.
Record-length expansion for the US
The IMF projects that the US economy will slow slightly in 2020, but numbers still remain strong, continuing their longest economic expansion on record. In late January, the Federal Reserve left interest rates unchanged and changed their description of household spending to ‘moderate’ rather than ‘strong’. Low unemployment and rising income are fuelling consumer confidence and modest household spending.
With the upcoming presidential election, President Trump will avoid implementing policies that will negatively impact the economy and possibly jeopardize his opportunity for a second term in office.
Reaching stability in the GCC
Growth across the GCC countries is expected to remain modest in 2020. Oil prices are subdued, and although many countries in the region are diversifying away from their economic oil-reliance, the growth in non-oil exports is being hindered by the slowdown in the global economy.
In the UAE, the economy is expected to pick up this year, as Expo 2020 restores business volumes and bolsters the tourism industry. However, already in early 2020, we see a decline in the Purchasing Managers Index and consumer pricing. Saudi Arabia, the largest economy of the region is expecting modest growth in GDP from a very low base in 2019. This projected growth is dependent on oil market conditions, with any pressure on oil prices resulting in a reduction in output, risking this growth projection. In Bahrain, economists expect 2020 growth to stabilize, rather than recover on the basis of flat non-oil-sector growth; the economy is vulnerable to the pace of disbursement of the $7.5 billion GCC development fund, which was announced in 2011. On the back of the Coronavirus and the associated reduction in demand, oil prices fell by 20% in early February from the same day in January. This volatility, together with geopolitical tensions in the region, pose major downside risks for the GCC going forward.
Contributors: Kim Hegarty